Membership Conditionality and Institutional Reform: The Case of the OECD

Transcription

1 Membership Conditionality and Institutional Reform: The Case of the OECD Christina L. Davis Princeton University Prepared for presentation to the Annual Meeting of the International Political Economy Society, Claremont Graduate School, October 25th 2013 Christina Davis is Professor of Politics and International Affairs at Woodrow Wilson School and Department of Politics, Princeton University I thank Nathan Eckstein, Raymond Hicks, Sohee Khim, and Shiro Kuriwaki for valuable research assistance. I am grateful to Karen Alter, Brian Greenhill, and Julia Gray for comments on earlier versions of the manuscript. This paper draws on similar themes and analysis in my paper with Meredith Wilf Joining the Club: Accession to the GATT/WTO, and I am grateful to Meredith for her insights to help improve this paper.

2 Abstract The process of joining an IO may lead to liberalization before membership. Thus studies that only evaluate compliance after membership underestimate the effects of the institution. Conditional membership may be one of the most important sources of leverage for IOs. The rule-makers establish rules that dont go far beyond what they would otherwise do, but rule-takers often must accept a broad range of policy reforms they would not otherwise consider. The influence of accession conditions has been studied in the context of EU and NATO, where sizable benefits motivate major concessions by applicants. This paper examines a much less powerful organization, the OECD. The politics of joining organizations touch closely on concerns about status and legitimacy as well as functional demands for cooperation in complex issue areas. This is especially true for the elite club of the OECD. Yet surprisingly deep reforms have been made by applicants to enhance transparency of regulations and liberalize the economy as part of the process to become a member. This paper examines OECD membership from perspective of institutional design of accession conditions and effectiveness to promote policy change. Statistical analysis highlights broad conditions related to democracy and geopolitics that encourage earlier entry into the OECD relative to other countries while there are surprisingly less clear patterns for the role of trade and financial openness. Case studies of Japan, Mexico, and Korea are used to examine how the expected status gains from OECD membership motivated specific reforms in regulatory policies and trade. These countries outside of the transatlantic core of the organization sought to benefit from association with the advanced industrial democracies. Through policy reforms to meet the demands of members and on the basis of shared liberal orientation and geopolitical alignment, these outsiders were accepted into the club.

3 1 Introduction The endogeneity of entry into international agreements has been a central challenge to theories of institutions. Theories explain the demand for institutions in terms of their ability to resolve information problems and facilitate mutual gains through cooperation. Those states that stand to gain from cooperation are more likely to choose to establish and join the institutions, which necessarily means that the effect of the institution is in part due to screening effects (Downs, Rocke and Barsoom, 1996; Martin and Simmons, 1998; Simmons, 2005). Analyses of institutional effectiveness that compare members to nonmembers are subject to criticism for failing to control for the propensity to join the institution. To address these challenges, it is necessary to understand the politics of joining organizations. Research highlights the need to give attention to both the supply and demand side influences on membership decisions when studying accession for organizations ranging from the WTO (Pelc, 2011; Davis and Wilf, 2013), the EU (Schneider, 2009; Gray, 2009), and NATO (Kydd, 2001). This paper contributes to building a theory of selection into organizations through investigation of one organization, the Organisation for Economic Co-operation and Development (OECD). It offers three insights into selection: first, to show selection is non-random; second, to demonstrate how conditional membership brings policy reform; finally, to illustrate that screening occurs across more dimensions than the policies regulated by the organization. The OECD serves as clear example that membership is not random as one observes strong patterns of correlation on income, alliance, and democracy. This is important caveat in light of the large number of political science studies that use OECD membership as criterion for analyzing subset of countries without explicit attention to determinants of OECD membership and potential biases or outliers that could arise in their research as result of sample selection. The paper provides empirical evidence of how conditional membership brings policy change. Entrants make substantively important commitments to liberalize trade, finance, and investment policies during accession in order to achieve membership approval. Finally, the selection process is revealed to be both screening for countries that favor economic cooperation and attraction of like-minded states on more diverse criterion such as geopolitical interests. 1

4 The OECD is an organization of countries dedicated to promote development. As such its policy scope extends across a range of different economic policy dimensions including trade, finance, and investment where there is overlapping mission with other multilateral and bilateral agreements. It has played a central coordinating role for development aid and stands as the only multilateral organization to develop agreements on bribery and taxation. More broadly, its reports include environmental, labor, and education policies. Through monitoring reports and production of consolidated data on policies, the organization functions as a think tank and center of information sharing among members and broader international community. The organization has weaker enforcement than the WTO but actually appears to have larger effect on trade liberalization among members. In one study, Rose (N.d) finds that OECD membership increases the average value of bilateral trade by over fifty percent, which is more than the increase attributed to belonging to either the GATT/WTO or IMF. In a specification of gravity model that includes dyadic and importer and exporter year fixed effects and controls for membership in alliances and EU (EEC for early years), Davis and Gowa (2013) find that there is a positive and significant effect of the OECD on imports; the effect size is almost half the magnitude of that for EU membership, and four times larger than the effect of GATT/WTO participation (the latter is statistically insignificant). The challenge to understanding the effect of OECD, however, is that selection into the organization is endogenous with decisions to undertake economic reforms and to improve relations with existing members. On the one hand, trade liberalization prior to joining would cause downward bias that could mean the above results underestimate the effect on trade. 1 On the other hand, if these reforms are undergone for reasons unconnected to joining the organization itself, the positive effect attributed to membership is spurious correlation. Membership may screen for those states that already have positive economic reform preferences (Downs, Rocke and Barsoom, 1996; Von Stein, 2005; Gray, 2009, e.g.). Furthermore, membership selection is not only a function of economic reform trajectory but also political relations. It is no accident that Turkey was a founding member of OECD because it had been among the recipients of 1 Rose (N.d, p. 688) makes this point directly. 2

5 Marshall Plan aid as member of NATO, while East European membership in OECD came after the end of the Cold War opened political relations with the West. Democracy has also become explicit criterion for membership. To the extent that economic reform trajectory, positive political relations with the West, and democracy are all likely to correspond with benchmark measures of economic outcomes such as trade, it is very difficult to identify the causal effect of membership. More understanding of selection into membership is necessary to provide basis for future research into effectiveness. The evolution of the OECD from twenty founding members in 1961 to thirty-four members today reveals several puzzles. How did an organization with no formal conditions required for accession maintain core features as a group of like-minded countries while expanding beyond its origins as economic counterpart to NATO? Contrary to conventional wisdom, the rich country club includes developing states and has been open to non-democracies as well. Turkey s status as founding member is pertinent, and accession by Mexico in 1994 reinforces the diversity of membership. Nevertheless, the OECD is not universal organization and remains a small club that requires applicants to meet rigorous standards before entry. But this presents a second puzzle. Why would countries make reforms on entry to an organization that offers benefits to members and non-members alike? Theories of institutions suggest that discrimination and reciprocity form foundation of logic supporting institutional cooperation. Thus it is unusual to see cooperation that does not follow logic of reciprocity. This paper analyzes the OECD accession process with attention to the debates on both the supply and demand side of the membership decision. I develop an argument about strategic learning and statusseeking in which states choose whom to emulate when deciding to join international institutions. Existing members act as gatekeepers to exclude those who do not appear likely to fit in the club. This dynamic allows for more agency by applicant states than is commonly seen in the literature on diffusion where states respond to competitive pressures or common culture and region as basis for policy convergence. At the same time, the supply side restraint, which may be dictated by non-economic considerations at the whim of current members, creates space for agency on the side of the IO such that membership is more than simple reflection of preferences. Those that join must meet both criterion: preference to become 3

6 like the advanced industrial democracies and sponsorship by existing members. Using case studies of three outsiders who join the club, Japan, Mexico, and South Korea, I illustrate the prominence of status and affinity in the efforts by leaders to make the necessary concessions to gain entry to the OECD. The paper proceeds with a review of institutional theories on accession and membership in organizations and develops my argument that states select based on similarity of type more than specific conditions. To show the features of membership, descriptive statistics compare OECD members with non-members along key dimensions. I analyze selection into the organization with a duration model of time to join the OECD that highlights the importance of political variables for democracy and geopolitical alignment to bring more rapid membership even when controlling for key economic measures and regional location. A case study section explores more closely the decisions to join in terms of the motives of the applicants and the specific policy reforms they agree to undertake as price of membership. 2 Membership Conditionality and IO Leverage The motivating question is to explain the determinants of membership and how the accession process brings policy reforms. My study applies insights from theories of collective action and coercive bargaining, but emphasizes the informal nature of the conditions that motivate states to seek membership and win approval. 2.1 Literature review The design of institutions is closely related to their membership. Koremenos, Lipson and Snidal (2001, p. 783) writes: If an institutional arrangement restricts the benefits of cooperation to members, actors have an incentive to pay the price of admission to the club. One of the most important features of institutions is to define those boundaries of membership. When states face a problem of collaboration where free-riding requires centralization and strict enforcement, they are more likely to seek restrictive membership. The benefits of creating a small like-minded club also arise under circumstances of uncertainty. Raising costs to membership offers one way to increase confidence that a state is of the type willing to cooper- 4

7 ate, in effect forming a costly signal of cooperative type in the formal modeling terminology (Koremenos, Lipson and Snidal, 2001, p. 784). The small club configuration also may arise as the result of power distribution. When great powers face more divergent interests with other international actors than amongst themselves, Drezner (2007, p. 67) argues that they will form club standards; Club IGOs, such as the Group of Seven countries(g7) or the OECD, use membership criteria to exclude states with different preference orderings and bestow benefits for in-group members as a way to ensure collective action. He points to examples such as the 1997 OECD Anti-Bribery Convention which was quickly concluded among OECD members after a failed attempt to negotiate on this issue at the United Nations (ibid., p. 77). Once negotiated within the smaller group, the United States and Europe effectively exported these standards to a wider range of countries. Yet there are conflicting pressures against reducing member size. In the face of distributional costs, larger membership is thought to promote cooperation by supporting diffuse reciprocity, issue linkage, and broader total gains (Keohane, 1984; Koremenos, Lipson and Snidal, 2001). To the extent that an institution provides gains to powerful states, it must elicit the voluntary cooperation of other states through institutions so that it can avoid the need for compelling their actions. 2 Governments face a catch-22: it is risky to allow a state to enter the institution when it is not already compliant, and yet this prevents adding governments on the margin that could be influenced through participation in the institution, either from socialization or from functional institution arguments about raising the costs of defection and improving coordination for mutual gains. For example, Pevehouse (2002) argues that IOs shape democracy after states have joined rather than through membership conditionality. One suggested solution to this depth-breadth trade-off is for states to form institutions around a small core of liberal states and expand as other states experience convergence of preferences through exoge- 2 Stone (2011) connects voluntary participation as the foundation of legitimacy for an international organization, but does not focus on the breadth of participation. 5

8 nous process. Downs, Rocke and Barsoom (1998) theorize that this form of sequential liberalization can achieve the most overall cooperation. There are also possibilities for states to construct differential membership through varying the entry conditions and commitments across the membership (Gilligan, 2004). In a study of the European Union eastern enlargement negotiations, Schneider (2009) shows that the concessions offered by new entrants varied widely and long transition periods introduced what in effect was discriminatory membership. In a key contribution, she highlights that the cost benefit analysis must be viewed on both sides in terms of how much gains were seen from enlargement for the existing members as well as the applicants. When policies are complementary or neutral, enlargement presents few problems; it is in policy areas that present rival consumption characteristics that distributional conflict may become an obstacle (Schneider, 2009, p. 60). These are policies where more participants directly reduces the benefits to each as they share the limited resource such as budget transfers. The basis for common interests need not be limited to one issue dimension. Indeed it is through issue linkage that international institutions construct packages of agreements acceptable to wide membership. Even outside of the scope of the institution, side payments and foreign policy considerations offer incentives for states to seek membership. Moravcsik (1998) in his theory of European integration shows how geopolitical interests alongside economic gains for powerful member states shaped their demand for construction of regional institutions. The process that brings about policy convergence has been widely studied across a range of issue areas under the rubric of diffusion literature. In their influential research on this topic, Simmons, Dobbin and Garrett (2006) portray states making interdependent decisions to adopt similar policies that they see other countries adopt, and posit four diffusion mechanisms as coercion, competition, learning, and emulation. States are shown to have adopted IMF Article 8 largely from competitive market pressure as regional neighbors adopt similar policies (Simmons, 2000). More broadly economic and political liberalism in the form of market reforms and democracy have spread across countries (Simmons, Dobbin and Garrett, 2006). In context of membership, using conditions of accession to bring policy convergence represents one 6

9 form of coercion. Although presumably there are sufficient benefits for applicants to voluntarily undertake this process, the one-sided nature of being a candidate for membership opens the opportunity for members to demand reforms fit to their own interests. The pressures that arise from exclusion as key market competitors receive benefits of membership forms a competition-based rationale for seeking membership. Here one expects states to seek membership when their competitors are members and as they come to recognize need to adopt the entry condition policy reforms simply to remain competitive. The second two sets of diffusion mechanisms account for why leaders would decide to adopt specific policies. Learning as a mechanism as developed here emphasizes the role of shared knowledge that leads states to draw on the lessons from experiences of other countries. As one example, Latin American countries updated their beliefs about gains from privatization as they observed states successfully navigate privatization reforms to achieve high growth (MESEGUER, 2004). Here the attraction of membership would arise from the success of members adding greater validity to the policies that they advocate. Organizations themselves become an active agent spreading information to promote policy change through this mechanism. Finally, emulation represents a more passive form of learning in which states follow cues by actors they are close to in a process of determining the appropriate behavior. Finally there are arguments of shared norms and identity that bring states to seek common membership in organizations. Schimmelfennig (2001) explains European integration in terms of norms constructed through rhetorical statements about unity that forced leaders into positions not supported by rational interest calculation of costs and benefits. Once states had become rhetorically entrapped in their expression that European integration was based on an ideology of pan-european community of liberal-democratic states such that once the Central and East European countries could show that they shared liberal values and norms, the EU members found it difficult to exclude them despite the likely costs of doing so (Schimmelfennig, 2001, p. 48). When membership represented entry into a community, it fell outside of normal bargaining dynamic. Yet it is unclear whether the appeal of community norms is sufficient to lead applicants to make reforms when there is domestic opposition - Kelley (2004) finds that European accession for eastern states brought more policy changes in the controversial area 7

10 of policies toward ethnic minorities through the mechanism of conditionality (coercive diffusion), with little evidence that socialization processes led to change of policies by changing beliefs. These arguments are at the forefront of decisions about enlargement for the OECD. From a functional perspective, the organization can better serve its own mission to coordinate economic policies for growth and prosperity if it includes more countries. At the end of his term as OECD Secretary General, Donald Johnston made the pointed remark that how are you going to shape the global economy if you re basically working with a minority of it (Woodward, 2009, p. 105). At the same time, inevitably the addition of more countries introduces greater heterogeneity of preferences which can block decisions in a consensus organization. For zero sum issues, adding more members comes with real costs for distributional conflict. Sociological perspectives are also not free of this trade-off. Broadening membership adds further legitimacy and greater weight of peer pressure, but also reduces the sense of community and shared norms. Committee meetings that are overcrowded with participants are less likely to yield discourse and build small-world networks. 2.2 Selecting for Similar Type My focus is on the demand side shaping why applicants seek membership. I argue that rather than passively responding to economic competition or following role models defined by social relationships, governments select into a group as a deliberate choice to expose themselves to more competition and peer pressure. States seek status and success through association with the elite club. This process combines aspects of learning and emulation. The accession decision goes beyond learning described in the policy diffusion literature because it involves accepting a broad set of principles and participation in an ongoing dialogue over future policy direction. To the extent there is any assessment of policy efficacy, it is the sense that OECD members are the advanced nations with valuable information on a wide range of policy issues. Joining their circle confers status by virtue of membership and offers opportunities to learn how to be successful like these countries have been. Where the sociological tradition rightly gives attention to how countries can be shaped by following a lead country or prevailing policy trend, this overlooks the goal-oriented nature of deciding to join a group of countries. The decision to join the 8

11 OECD represents an effort to change identity. The applicants seek to have their position in international society defined by their attributes as liberal states. As such applicants are self-sorting into the group of rich, liberal democracies of the Western alliance. This explanation stands in contrast to commitment mechanisms whereby states endeavor to buy credibility through increasing the costs of defection. With its weak mechanisms of enforcement, the OECD is a poor tool for tying hands. At entry countries can make reservations to exclude sensitive policies, and after entry the worst cost of violating OECD principles lies in critical commentary. Real policy commitments are made as part of accession, and the peer review mechanism raises costs of defection, but stronger tools lie in other multilateral organizations for countries in need of locking in policy liberalization. The status premium placed on OECD membership also suggests a non-economic dimension to economic competition. Joining the WTO provides differential market access, but in its role as a think tank, OECD services are equally available to all states. Yet market actors responding to uncertainty may rely on the OECD as a brand. Whether in financial markets or in competition for investment, the status of OECD membership may carry value. Gray (2013) argues that investors face uncertainty and rely on cues about countries reliability based on their peer group, and provides evidence that membership in international organizations can increase bond ratings. The status-seeking motive for accession does not relegate the action to symbolic politics. Applicants must undertake policy reforms to earn entry to the club. Current members recognize the cost of admitting new members when there are only weak enforcement mechanisms. They have incentives to carefully screen for those countries with strong commitment to OECD principles and conditions that will make them responsive to OECD peer review. Demanding liberalization during accession negotiations is the most effective way to assure that entrants will not lower levels of cooperation. Screening for commitment follows the logic of coercive diffusion and leads to expectations that only after applicants have experienced change in preferences on economic policy will they be admitted. It is the concern with making sure that governments will be responsive to OECD peer review and not dilute the OECD brand 9

12 that encourages attention to conditions outside of economic policy reforms. Here the members look for friends, who can be rewarded through membership and are expected to remain cooperative. Both the demand and supply side of membership suggest that non-economic conditions of similarity will attract members to an organization. Specifically, political regime type and geopolitical alignment form important criterion to shape membership decisions. On the basis of common interests, states seek status by association and are welcomed into a club that relies on weak tools of enforcement and offers diffuse benefits. 3 Overview of OECD 3.1 Origins of the OECD The OECD grew out of the Organization for European Economic Co-operation (OEEC), which had been the organization established in 1948 to oversee implementation of the Marshall Plan aid. European governments were divided over the form of European integration with rival positions for an intergovernmental free trade agreement (EFTA) and a more centralized approach to delegate supranational authority within the European Coal and Steel Community, and the OEEC membership was split with seven in the former group and six in the latter. At the same time, the tensions of the Cold War had placed necessity behind efforts to strengthen NATO and even proposals to form an economic council within NATO to take over the OEEC role (Carroll and Kellow, 2011, p. 48). Against this background, twenty countries agreed to instead transform the OEEC into a new organization that would fully include the United States and Canada while shifting to focus from European development to a broader mandate of economic cooperation. The organization incorporated the codes of liberalization and peer review monitoring practices that had been central to the OEEC and adopted the goal to achieve fifty percent increase of GNP for the aggregate membership over the first decade from 1961 to 1971 (Carroll and Kellow, 2011, p. 51). Three important points stand out from the origins of the OECD: European-centered membership, Cold War context, and overlapping mandate with other organizations. Expanding outside of Europe would weaken the European role within the organization, but at the same time allow the organization 10

13 to carve out its own niche. Alternatively, the organization could have evolved into a parallel European regional association that would have eventually been supplanted entirely by the EU. 3.2 Costs and Benefits of membership Member dues are assessed based on paying a share of the OECD budget according to proportion of national income, such that larger states pay more up to a cap of 25 percent of total budget (Carroll and Kellow, 2011, p. 15). The G7 group of large states provide three-fourths of the core budget and also fund pet projects through voluntary contributions (Woodward, 2009, p.46). The budget process introduces an area for distributional conflict regarding enlargement to include small countries that will pay a negligible share of the budget while still drawing fully on organization resources. States agree to provide information to the OECD, and thus to expose their performance to public assessment. The peer review process builds on this information to provide the primary enforcement mechanism of the organization as states policies are examined in detail within a given area with the purpose to evaluate whether the state is meeting the best practice standards that have been established through OECD decisions (Woodward, 2009, p. 57). The widely used economic surveys represent an extensive review of economic data through a process that incorporates the members self-assessment as well as analysis by the secretariat and questioning by other members before completion of a final public report. OECD output ranking governments according to common benchmarks can become ammunition for domestic groups to use against their own government where its progress is found lacking. For states that have record of political interference to cook the books of accounting, compliance with objective data categories and reporting represents unwanted transparency. The Codes of Liberalization (formally two agreements, Code of Liberalisation of Current Invisible Operations and the Code of Liberalisation of Capital Movements) form the core OECD agreements. They embody the commitment of the organization to pursue liberalization of trade and capital. Subsequent agreements such as the 1994 decision on National Treatment for Foreign-Controlled Enterprises have since expanded commitments to FDI and other areas. In all cases, states are allowed to make reservations that carve out individual exceptions. Governments notify members of their policies related to the Codes, 11

14 and are subject to peer review. The organization lacks formal procedures for sanctions, and instead relies on a states concern for reputation and the role of persuasion to shape policy choices. Status conferred by membership represents a benefit that is difficult to quantify in value, but nonetheless stands out for importance in the cases of new entrants. While to some the stereotype of the OECD as a rich country club is derogatory, joining the ranks of an exclusive group offers an imprimatur of acceptance in the top ranks of international affairs. This nebulous concept is at the same time rival given that more members in the organization will only dilute the signal attained by those who join. From a market perspective, the value of association with the rich club can pay off in real terms through the channel of investor confidence. One benefit from membership that was especially important for the countries that joined in 1990s was in the form of lower interest rates on capital. Due to rules determined by the Basel Committee on Banking Supervision decision to apply zero risk weighting for bank loans to all OECD governments, accession to the OECD would substantially lower the cost of capital for Mexico and Korea (Claessens, Underhill and Zhang, 2008, p. 317). In part due to recognition that this led to excessive capital inflows into Korea that contributed to its financial crisis shortly after joining OECD in 1996, the 2004 revision to Basel rules on banking introduced a more complex risk assessment procedure that would end the zero risk weighting for emerging market OECD members that had been enjoyed by Czech Republic, Hungary, Mexico, Poland, Slovakia, South Korea, and Turkey (Ibid., p. 327). The greater access to policy learning is cited by many participants as key benefit of engaging in OECD. In extensive interviews with OECD member governments and the organization secretariat, Carroll and Kellow (2011, p. 38) remark that all without exception emphasize policy learning. Being in the room for committee meetings and technical discussions matters for both influence to shape the output of decisions and for opportunities to receive information. Staffing the organization is largely from members who send their officials to attend committee meetings or to serve within the organization. These national representatives play a critical role in the information exchange that is central to the OECD mission. Emile van Lennep, former OECD Secretary General, said ninety-nine percent of our work concerns 12

15 the exchange of experience and the elaboration of lines of action (Woodward, 2009, p. 24). Through directly participating in this process, member states can tap into the wealth of knowledge from the experience of their peers and the technical materials prepared by the Secretariat. Bureaucratic incentives favor membership as a means of access to positions within the Secretariat and on committees. Serving in Paris is an attractive assignment for location as well as expertise and connections that are valuable for professional development. Many of the public goods provided by the OECD in its role as policy think tank are available to all states. Each year the organization publishes more than 200 reports (Woodward, 2009, p. 57). As would any think tank, the organization actively disseminates its knowledge. Even the peer review assessment OECD Economic Survey has been undertaken by countries that are not members such as China and Brazil. Furthermore, the policy changes enacted by governments to conform with OECD recommendations do not discriminate among members and non-members in their application. When governments seek to liberalize trade and capital according to the Codes of Liberalization, they do so on MFN basis rather than conditioning the policies to apply to fellow OECD members. In this sense, there are few direct observed benefits to membership. 3.3 Accession Process Unlike many other multilateral organizations, the OECD does not set conditions or process for accession. 3 The OECD Convention sets out the following rules in Article 16: The Council may decide to invite any Government prepared to assume the obligations of membership to accede to this Convention. Such decisions shall be unanimous, provided that for any particular case the Council may unanimously decide to permit abstention, in which case, notwithstanding the provisions of Article 6, the decision shall be applicable to all the Members. Accession shall take effect upon the deposit of an instrument of accession with the depositary Government. These general terms allow considerable discretion for the current members to admit or exclude applicants. Currently, OECD decisions have called for new members to have both market economy and democratic political institutions. Yet founding members included states under authoritarian rule (Spain 3 Although see Davis and Wilf (2013) for discussion of how GATT/WTO also allows considerable discretion over accession. 13

16 and Portugal) at the time, and democratic reversals in Greece and Turkey were not grounds for exclusion. Likewise, even as Cyprus has met the demanding conditions for economic and political reforms necessary to join the EU, it remains excluded from OECD due partly to objections by Turkey on basis of tense political relations. The obligations of membership consist of commitment to implement the codes of liberalization agreed to by members, and this represents the main policy reform condition for applicants. A 2004 agreement in the Ministerial Council Meeting accepted a working group proposal that was intended to provide more specific guidelines for selecting candidates for accession, and yet instead reflects the ongoing discretionary nature of admitting countries to the club. Carroll and Kellow (2011, p. 123) describes that the criteria for suitability can be boiled down to four points: there had to be like-mindedness ; the state had to be a significant player ; there needed to be mutual benefit from membership; and there had to be regard given to global considerations, particularly keeping some sort of agreed balance between European and non-european members. At first it would seem that income represents a critical threshold to define a subset of countries eligible to join. Yet this belies the early membership of Turkey as founding member. Furthermore, recent entrants are far down the list of countries in terms of economic size. Woodward (2009, p. 105) refers to minnows like Estonia that ranked between Uganda and Jordan in terms of World Bank rankings of GDP in 2007 when they were invited to initiate accession to join the OECD. The European origins of the OECD continue to privilege those from the region even as the organization embraced Japan and Australia early on. Today members span all continents, with the exception of Africa, and South Africa is among the countries to have expressed interest in membership and get involved in the enhanced engagement with OECD that is intended to prepare countries for membership. Thus we can see that even while there is a common set of characteristics shaping the organization, they do not represent firm criterion for democracy, wealth, or location. 3.4 Common Features of the Like-Minded Club A brief overview of the characteristics of members and non-members in the OECD confirms the expectation that income for the rich country club is higher than non-members. Figure 1 shows the average per capita GDP for OECD members relative to non-members over time. Not only are the members wealthier, the gap between the rich club and the rest has increased. Nevertheless, it is also important to examine the distribution of income shown in figure 2. The box plot of OECD members is centered at the mean income of thousand U.S. dollars (over the full period 1961 to 2012 taking the average income for 14

17 Average Income Per Capita GDP (million constant U.S. dollars) OECD Members Non OECD Year Figure 1: Income Trend: The figure displays the mean per capita GDP of OECD members and nonmembers over time. all members in each given year), with a large cluster of high income outliers above the fourth quartile. The non-member distribution is more skewed with a lower mean income of 6.65 thousand U.S. dollars and longer tail of high income states. This clearly demonstrates that while the OECD members are rich on average, there are also many wealthy non-members, including those with oil wealth, tax havens, and some industrial economies such as Russia. Figure 3 shows the dominance of democratic regime types among OECD members where the modal polity score is the highest level of 10 for consolidated democracies. Nevertheless, authoritarian governments have been members of the OECD. Non-members over this period from 1961 to 2012 have authoritarian regime as the modal polity score, but many states achieve high democracy scores without entry to the liberal club. Within the non-member grouping are important actors that have embraced many of the liberal economic and political policies advocated by OECD. India and Brazil stand out as two democracies that are major emerging markets of importance to the global economy but remain outside the OECD. As the target of outreach by OECD they participate in enhanced engagement and undertake peer monitoring by requesting an economic survey report on their economic policies, and yet India has explicitly stated 15

18 OECD Non OECD Income Distribution Per Capita GDP (in 2005 US dollar prices) Figure 2: Income Distribution: The figure displays the distribution of per capita GDP for OECD members and non-members over the period 1961 to it does not seek to formally join OECD and Brazil also eschews negotiations toward accession. For both their international status derives from leadership of the developing world, rather than seeking entry to the advanced industrial world despite taking all efforts to achieve economic growth. Singapore long ago achieved income levels that surpass that of many OECD members and would easily meet most of the policies for liberal market economy. Its non-democratic status may be one obstacle, but Carroll and Kellow (2011, p. 122) emphasizes that Singapore has not applied because regional identity makes Singapore seek to avoid any step that could upset its neighbors or detract from the image as a Chinese island in a Malay sea. This leads to the third dimension of similarity that shapes the OECD members: geopolitical alignment. Figure 4 clearly displays the pattern of shared alliances among OECD members, who on average 16

19 OECD Member OECD Non Member Density Density Polity Polity Figure 3: Political Institutions: The figure compares the frequency of government institutions across the range of Polity score index in which -10 is authoritarian and 10 is fully democratic. have alliances with ten fellow OECD members. 4 The organization had its origins within the effort to use economic cooperation to build cohesion in the Western Alliance and all NATO members joined the OECD. This accounts for why Turkey as a non-democratic and poor country joined the ranks of OECD founding members in Nevertheless, the founding group also included nonaligned Switzerland, Austria, and Sweden and many non-nato countries would form those who joined the organization in subsequent enlargement. votes. 5 Another measure of geopolitical alignment is voting similarity in UN General Assembly roll call Looking at the trend of UN voting patterns for the OECD and non-oecd subset of countries 4 The alliance data is from Correlates of War Formal Alliances Version The data here are from the s3un variable in Anton Strezhnev; Erik Voeten, , United Nations General Assembly Voting Data, UNF:5:NpHV5DXWPNWMWOrLGTjQYA== Erik Voeten [Distributor] V5 [Version 5] 17

20 OECD Non OECD Shared Alliance Ties Number of Alliances with OECD Members Figure 4: Alliance Ties: The boxplot graphs display the distribution within the OECD membership in comparison to the non-member countries in terms of the number of shared formal alliances with OECD members. over time in figure 5 shows the consistency across different periods in the higher similarity of OECD members in their voting affinity with the United States (left graph) and three major European states (right graph). Figure 6 displays the distribution of UN voting similarity for OECD and non-oecd countries when pooling observations over the entire period from 1961 to The higher similarity of OECD members with both the United States (left graph) and three major European states (right graph) further supports the geopolitical similarity of members. Yet one also observes clusters of countries outside of the OECD that have very convergent UN voting records, as seen by the group above the fourth quartile in the non-oecd sample. Likewise, UN voting among OECD members encompasses a wide range of values. This may be a like-minded club, but it allows for diversity of opinion on some issues that arise in UN General Assembly voting. In summary, the descriptive statistics support the general view of OECD membership representing wealthy democracies of the Western alliance system. On the margins, however, the criterion for advanced income, democracy, and geopolitical alignment were in some cases seen as substitutes such that meeting one dimension would compensate for falling short on another dimension. The rest of this paper will 18

21 UN General Assembly Voting Affinity with U.S. UN General Assembly Voting Affinity with Europe Mean Affinity Index Score OECD Members Non OECD Mean Affinity Index Score OECD Members Non OECD Year Year Figure 5: UN Voting Pattern Over Time: The graphs display the mean affinity scores for UN voting across the OECD membership in comparison to the non-member countries. The affinity index ranges from -1 to 1 and is calculated based on voting across the three categories of affirmative, abstain, and negative votes with higher values reflecting greater similarity in voting. The figure to the left represents similarity with the United States and the figure to the right represents similarity with the United Kingdom, France, and Germany (taking the average of similarity with each of the three European states). examine more closely how states on both sides of the membership question weighed their readiness to join across these issue areas. 19

22 OECD Non OECD UN Voting with U.S. Voting Similarity to US OECD Non OECD UN Voting with Europe Voting Similarity to UK, France, Germany Figure 6: UN Voting: The boxplot graphs display the distribution within the OECD membership in comparison to the non-member countries in terms of their voting in the United Nations. The affinity index ranges from -1 to 1 and is calculated based on voting across the three categories of affirmative, abstain, and negative votes with higher values reflecting greater similarity in voting. The figure to the left represents similarity with the United States and the figure to the right represents similarity with the United Kingdom, France, and Germany (taking the average of similarity with each of the three European states). The data pools data from 1961 to

23 4 Statistical Analysis of OECD Accesssion To more fully examine the correlates of membership in the OECD I use a duration model to estimate the time for a country to join the OECD from the date of its establishment in The question of interest here is why Turkey would be among the original members to join in year 1 while Mexico would join thirty-three years later and others such as Singapore remain outside of the organization. In the context of hazard model estimation, the model estimates the rate of failure by which is meant membership in the OECD as the dependent variable. I first look at how different groups have distinct baseline survival trend when describing the rate of failure. Figure 7 shows the estimated survival curves using Kaplan-Meier estimates. The first graph on the left shows the significant difference for European countries relative to non-european countries as the former have a sharper decrease in the probability to remain outside the OECD for each year following the establishment of organization. For the display of descriptive comparison of the variation in survival probability, U.S. allies offers easy comparison as dichotomous measure for geopolitical orientation. The right graph reveals the smaller but nonetheless statistically significant difference between the survival probability of U.S. allies and non-allies with the former more likely to have joined at any specific period in time. The figure highlights the clear pattern for European countries and U.S. allies to be among the first to line up to join the OECD. Given the expectation that there is not a constant rate of failure, the cox proportional hazards model is appropriate specification that allows me to include time-varying covariates while also controlling for the clear strong pull of European geography. 6 The sample includes 150 countries for the period from 1961 to Standard errors are clustered on country to to take into account possible correlation of error terms across years within the same country. The key relationships highlighted above in descriptive statistics are tested in the regression analysis with focus on how not only income but also alliances and democracy exert positive pressure on countries to join the organization. My main variable to measure geopolitical interests is the number of allies within existing OECD membership (COW alliance data), and I also examine the effect of UN voting affinity to members. I use the polity 2 index to measure democracy. Location in Europe is important variable 6 I apply the Efron method of ties. Countries enter the dataset in 1961 with the founding members experiencing failure in year one. All countries exit the dataset after year of failure when join OECD or in 2012 for those that do not join and are right-censored. 21

24 Estimated Time To Apply by Region Estimated Time To Apply by Alliance Estimated Probability a Country Has Not Joined European Non European Estimated Probability a Country Has Not Joined US ally Non ally Years before join Years before join Figure 7: Estimated Negotiation Survival Curves: Using Kaplan-Meier estimates of survival, the figure shows the estimated probability for a country to remain a non-member 22

25 Variable coef exp(coef) robust se z p Alliances (sum of OECD allies) Polity Polity x log(time) European region Per capita GDP (log) Trade openness IMF Article Table 1: Cox Proportional Hazards Estimates For Time to Joining OECD: Results of a Cox Proportional Hazards Model estimating the time to join for all countries. because the organization has its roots in European development that continues to shape the character of organization. 7 Three variables control for economic determinants of membership. Income is measured as per capita GDP (Real GDP at constant 2005 national prices in mil. 2005US$ from Penn World Tables), and is expected to have positive effect conforming to the notion that OECD represents rich country club. Liberal trade and financial policies form key benchmarks for economic policies conducive to participation in the organization; I include measures of trade openness (imports and exports share of GDP) and an indicator of whether a country has ratified IMF Article 8. A test for whether covariates meet the proportional hazard assumption shows that this assumption is not met by the polity measure of democracy, which indicates that the residuals are not constant over time. Therefore it is necessary to model the effect of democracy as conditional on time through adding an interaction term between polity and the log of time since 1961 Box-Steffensmeier and Zorn (2001). All other covariates in the model meet the proportional hazard assumption without interaction. 8 Table 1 presents the coefficient estimates indicating the direction and significance of effects (coefficients in the cox proportional hazard model are not otherwise informative about substantive effect size). The results confirm that alliances with OECD members make a non-member have higher probability to 7 In the baseline specification shown in the paper, Europe is included as control variable. Additional models show that using the alternative to stratify based on European and non-european countries to allow for distinct baseline hazard (akin to fixed effects) yields consistent results. 8 Including GDP in some additional specifications, however, is problematic because it does not meet the proportional hazard assumption. The model does not converge when including multiple covariates interacted with time. I focus on the polity variable where conditioxnal effects on time are most plausible in theory. 23